How net investment income tax works
By Jude Wallis
Net investment income tax is an extra 3.8 percent on a slice of investment income once modified AGI clears a threshold. On this sheet the slice is given, so the tax is 3.8 percent of that slice. $20,000 of NII produces $760. $5,000 produces $190.
Tax-equivalent yield
5.15%
A taxable yield of 5.15% leaves 3.50% after 32 percent tax, matching the tax-exempt quote.
- Tax-exempt yield
- 3.50%
- Marginal tax rate
- 32%
- Tax-equivalent yield
- 5.15%
- Check: after-tax taxable yield
- 3.50%
The yield on the municipal bond or other tax-exempt instrument.
The federal rate that would apply to a taxable alternative. State tax is a separate adjustment.
On this page
In short
- The teaching identity here is 3.8 percent of a stated net-investment-income slice.
- $20,000 of NII produces $760 of NIIT.
- $5,000 of NII produces $190 of NIIT.
- The live statute takes the lesser of NII and MAGI minus a filing-status threshold. This sheet supplies the slice already.
An extra percent on investment income
The net investment income tax, often called NIIT or the 3.8 percent tax, is a surtax on a defined slice of investment income for filers whose modified AGI clears a threshold. Interest, dividends, rents, and capital gains can sit in that slice. Wages generally do not.
On this teaching sheet the slice is an input, so the identity is
On $20,000 of NII the tax is $760. On $5,000 it is $190.
How investments are taxed is the ordinary and capital-gain schedules underneath. NIIT sits on top of those, not instead of them.
The threshold is a gate, then a lesser-of
A live computation takes the lesser of net investment income and the excess of MAGI over a filing-status threshold. If MAGI is under the threshold, NIIT is zero even if NII is positive. If MAGI is over the threshold by less than NII, the tax is 3.8 percent of that excess, not of all NII.
This sheet skips that lesser-of so the 3.8 percent line is visible. Put the slice that would actually enter the tax.
The tax-equivalent yield calculator on this page compares a tax-exempt yield with a taxable one. NIIT can change that comparison because it is an extra percent on the taxable investment side. Tax-exempt interest is often outside NII.
Not FICA, and not the extra Medicare wage surtax
How FICA works is 6.2 plus 1.45 percent on wages. The additional Medicare tax on high wages is a different 0.9 percent. NIIT is 3.8 percent on a defined investment slice. High earners can see more than one of these. They are not substitutes.
Capital gains tax is the schedule on the gain. NIIT can apply to the same gain after that schedule.
Scope of this sheet
The two teaching rows are $20,000 of NII to $760 and $5,000 of NII to $190, both at 3.8 percent. They are not a MAGI threshold, not a lesser-of, and not a filing status. This is educational material, not financial advice.
Worked examples
3.8 percent of \$20,000 NII
The NII slice that enters the tax is $20,000. The rate is 3.8 percent. What is NIIT?
- Tax is .
- That is $760.
NIIT is $760 on a $20,000 NII slice.
3.8 percent of \$5,000 NII
The NII slice is $5,000. Same 3.8 percent. What is NIIT?
- Tax is .
- That is $190.
NIIT is $190 on a $5,000 NII slice.
Common questions
Does NIIT replace capital-gains tax?
No. It is an extra percent on a defined slice. The capital-gain schedule still applies to the gain. NIIT can apply to the same dollars after that schedule.
Is municipal bond interest in NII?
Tax-exempt municipal interest is generally outside net investment income. Taxable interest is generally inside. The definition of NII is a statute, not this 3.8 percent multiply.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.